How to Diversify Investment? A beginner's guide for 2024!

Ups and downs in the stock market do have a direct bearing on an individual’s financial portfolio, particularly if you have invested in equity assets. While it is not possible to completely avert risks, one can always mitigate them by creating a well-diversified investment portfolio. This decision will not just help you to tackle market downturns, but also help in long-term wealth creation.

What is diversification and why is it important?

Diversification may sound like an enormous task, especially if you are a beginner in the world of investing. Before moving ahead, it is important to understand what diversification means. In the context of the stock market, it is about avoiding a single channel of investment, and ensuring there’s a good mix of investments that behave differently in the market.

This helps in reducing the risks associated with a single asset. In case one asset doesn’t perform well, another’s positive performance can offset the negative impact and ensure stability.

• Get a better understanding of asset classes

  Asset classes are different types of investments that are a part of your financial portfolio. They could be anything from stocks, bonds or commodities. There are also alternative investments like real estate and hedge funds that do not have much association with the stock market. Remember each asset class has different associated risks and returns. Try and invest in a few tax-saving options!

• Diversify by asset class

  The asset class you choose is dependent on the investment time horizon, which means the time you plan to hold your investment. For instance, if you are young, you are likely to have a much higher risk appetite and can invest in stocks.
  
  On the other hand, if you want to play it safe, then opt for bonds or fixed-term securities or Unit Linked Insurance Plans that might minimize the risks and maximize the market returns. Here’s a tip to know your ideal allocation between stocks and bonds. Subtract your age from 100, whatever you get is the percentage you must invest in stocks.

• Go for diversification within asset class

  Dig deeper and research the companies you want to invest in, within a specific asset class. This will help you understand the profitability and dependable earnings of any company. Also, check the credibility of a company and find out if they have a reliable senior management team. When you have a mix of companies in your portfolio, it helps you mitigate the impact of market downturn much better, ensuring greater stability.
  

• Plan an investment in ETF

  Exchange-traded funds (ETF) are a collection of securities responsible for tracking specific sectors and market segments, and work much like mutual funds. They can give you greater exposure than you will receive if you invest in a single stock. Plus, they have a significantly lower price than mutual funds. They offer more tax saving options than mutual funds.

Some other tips…

You can also go for fixed-income assets like bonds that offer protection from market volatility. Also, follow a buy-hold strategy and ensure you keep long-term saving goals in mind while investing in asset classes. Lastly, keep adding assets to your investment portfolio and regularly review your investments to understand what’s performing well and what’s not. Accordingly, you can figure out the best course of action.  

Related Articles:

• 10 Types of Investments in India and How they work
• Best Investment Options in India
• How to manage risk in your investment portfolio?
• New or Old Regime for Financial Year 2023-2024 (Assessment Year 2024-25)
• Old Tax Regime vs New Tax Regime: Who should opt?  How is it Beneficial?
• Types of Life Insurance in India

ARN -  ED/04/24/10921